- Consider two polluting firms. The marginal cost of abatement
for firm 1 is MC1 =
e1 + 300, and the marginal cost of
abatement for firm 2 is MC2 =
3e2, where e1 and
e2 are the tons of pollution abatement by firms 1
and 2, respectively. Baseline pollution levels are
bl1 = 2000 and
bl2 = 2000.
Suppose the government sets a pollution reduction goal of 1600
total units of abatement.
- Write down two equations that ensure that the goal will be met
cost-effectively. Explain in words what each equation ensures.
- Solve the equations for the cost-effective abatement allocation
e1 and e2.
- Suppose that the government wants to achieve this abatement
level with a pollution tax. What tax rate (in dollars per ton)
should be levied? How much tax revenue will be raised from each